This a mega-interesting story by Bloomberg attached, and maybe the read for the day.
Particularly interesting is the point that a major U.S. public employee pension fund sold its exposure on Russia, I presume due to environmental, social, and governance concerns around Russian malign actions against the United States. And seemingly they were big investors in Russia – so someone must have tapped the private markets on the shoulder.
This I think just shows the power of environmental, social, and governance concerns, as a self-regulator almost.
It has long puzzled me that despite the marked deterioration in Russia – Western relations, and credible claims of Russian malign action against the United States, including the latest SolarWinds attacks which seemed to go beyond simple espionage but attacks against U.S. critical infrastructure, that numerous U.S. public sector employee pension funds were still invested in Russia. Many have seemingly been in Russia for a very long time. It’s also quite possible that U.K.- based public pension funds were/are similarly invested, for example, the British police, or the local council in Salisbury.
If this report is to be believed we may be about to see a flood of similar public employee pension funds begin to ask more questions about where their funds are being invested, and are they invested in the interests of the U.S. or U.K.? Perhaps think Russia, but also other authoritarian regimes, and for example China, but the list in emerging markets could be quite long.
Ultimately these countries will pay the price, they will see more modest foreign inflows, and higher borrowing costs, presumably as a result, and the hope is I guess that this will begin to think more about environmental, social, and governance, and not just the “greening” with all the focus on only the “E” bit of ESG. The problem for many of these countries is that improving “S” and “G” are really difficult and involve risky political and societal change which they really do not want to do.
Now returning to the specific story of the US signaling it is looking at further sanctioning Russian sovereign debt, it seems that people in the U.S. government were briefing journalists here. Maybe this is because the first wave Alexei Navalny sanctions were deemed as being too light. Someone seems to want to get the message out that further sanctions are possible, even likely. They want to put pressure on Moscow. And it seems that the message is that further sanctions on sovereign debt will be amongst the next iterations on Russia when they come.
Now the next iteration could be, I guess:
* After the 90-day response period over Navalny, which would take us to June, presumably the Russians will fail to respond giving the information and assurances demanded by the U.S. and its allies. So I guess some sanction will follow;
* After the U.S. completes the ongoing review of the SolarWinds cyber attacks and broader Russia malign action, I would assume the US will feel compelled to respond.
* As noted in this report, on the back of the next Russian major escalation. The reality though is that given the experience of US – Russia relations over the period since perhaps 2007/08, the trend is pretty clear, from the Kremlin’s invasion of Georgia, and effective annexation of Abkhazia and South Ossetia; the annexation of Crimea; the invasion of the Donbas; the assassination of Alexander Litvinenko; the poisoning of Sergei and Yulia Skyrpal; the Montenegro coup; Turkey meddling; Syria; Libya; and US elections, backing for far right and far left in Western democracies. I guess we have to expect that Russia does more similar stuff because Vladimir Putin just cannot help himself as he sees Russia in a war in effect with the West. So we kind of have to expect more sanctions actions.
Looking at the specifics of what the U.S. could do next on the sovereign debt front, clearly it could extend sanctions on primary dollar issuance to primary ruble issuance, then moving to sanctioning secondary trading/holding of dollar and ruble debt, and even moving to bring state-owned enterprises into the designations.
And then the risks are that we see oligarch designations, as noted in this Bloomberg piece.
